What Is AMM (Automated Market Maker)?
Definition
An Automated Market Maker is a type of decentralized exchange that uses mathematical formulas instead of order books to price trades, with liquidity provided by users rather than professional market makers.
AMMs revolutionized decentralized trading by replacing traditional order books with algorithmic pricing. Instead of matching buyers and sellers, AMMs let users trade against a pool of tokens. The price is determined by a formula — most commonly the constant product formula: x * y = k.
- Users deposit two tokens into a liquidity pool (e.g., TOKEN + SOL)
- The pool's ratio sets the current price
- Traders swap against the pool, automatically adjusting the ratio and price
- Liquidity providers earn a percentage of each trade as fees (typically 0.25-0.3%)
- Raydium (Solana) — uses both CPMM (concentrated) and AmmV4 (traditional constant product)
- Uniswap (Ethereum/Base) — the original AMM, now on v4
- PancakeSwap (BSC) — similar to Uniswap
- Curve (Ethereum) — specialized for stablecoin pairs
Advantages over order books: always-on liquidity, no need for market makers, permissionless listing. Disadvantages: price impact on large trades (slippage), impermanent loss for liquidity providers.
Related Terms
Liquidity Pool
A liquidity pool is a pair of tokens locked in a smart contract that enables decentralized trading on automated market makers (AMMs) like Raydium and Uniswap.
DEX (Decentralized Exchange)
A DEX is a peer-to-peer exchange that enables cryptocurrency trading directly from your wallet without intermediaries, using smart contracts to match trades.
Raydium
Raydium is the largest automated market maker (AMM) and liquidity protocol on Solana, supporting both CPMM and legacy AmmV4 pool types.
Impermanent Loss
Impermanent loss is the difference in value between holding tokens in a liquidity pool versus simply holding them in your wallet, caused by price divergence between the paired assets.